Indian equity markets are experiencing a notable shift, with public sector undertakings (PSU) banks and capital expenditure (capex) stocks leading the gains. This resurgence comes as PSU banks demonstrate a closing of the performance gap with their private sector counterparts, while robust order books and investment cycles fuel growth in the capital goods sector. According to Dipan Mehta, Director at Elixir Equities, this isn’t a fleeting trend but a structural rebalancing within the Indian financial landscape.
The recent outperformance of PSU banks, particularly evident in the Nifty Bank index, signals a multi-decade convergence in valuations and performance, Mehta explained in a recent interview. Historically, private sector banks enjoyed advantages in growth rates and asset quality. However, PSU banks are now demonstrating improved balance sheets and a return to growth, attracting investor attention. This shift in investor sentiment is occurring despite the fact that stock prices haven’t fully reflected the strong earnings reported by these institutions, presenting a potential opportunity for investors.
PSU Banks: A Convergence in Performance
Mehta highlighted that the dynamics between PSU and private banks have fundamentally changed. While private banks once significantly outpaced PSU banks in growth – often doubling their rates – and maintained lower levels of non-performing assets (NPAs), the gap has narrowed considerably. “Many PSU banks are giving private sector banks a run for their money,” Mehta stated, adding that investors are recognizing the improved financial health and growth potential of these institutions. However, he cautioned that sustaining current net interest margins (NIMs) will be a challenge in an increasingly competitive banking environment.
Capex Cycle Drives Capital Goods Sector
Beyond the banking sector, the capital goods industry is also experiencing a positive trajectory, driven by a robust capex cycle. Companies involved in engineering, procurement, and construction (EPC) are benefiting from record order books and strong earning visibility for the next two to three years. Mehta emphasized the importance of execution for these companies, noting that delays can occur not only internally but also on the customer side. Despite this risk, the overall outlook for the sector remains positive.
Companies like Bharat Heavy Electricals Limited (BHEL) are key players in this upswing, but Mehta stressed the importance of successful project implementation. Firms with diversified revenue streams, such as Larsen & Toubro (L&T) and KEC International, are particularly well-positioned to capitalize on the current momentum, especially those with a significant portion of their orders originating from overseas. L&T, currently hitting all-time highs, is considered a particularly strong bet due to its diversified order base and substantial international revenue—approximately 40-50%—operating at reasonable margins.
A Cautious Outlook for FMCG
While optimism prevails in banking and capital goods, Mehta expressed a more cautious view on the Fast-Moving Consumer Goods (FMCG) sector. He specifically cited Dabur India as an example, stating that it, along with many other FMCG stocks, no longer meets his firm’s investment criteria. “For us, the benchmark to evaluate a company is at least it should grow more than the nominal GDP growth rate, which is 11% or thereabouts,” Mehta explained. He advised investors currently holding FMCG stocks to consider diversifying their portfolios.
Infrastructure and Wires & Cables: Continued Strength
The infrastructure sector continues to offer promising opportunities, particularly for companies with large and diversified order books. VA Tech Wabag, specializing in water projects, was highlighted as a firm of interest, alongside various companies involved in renewable energy equipment—solar, wind, and electric distribution. The wires and cables industry is also performing strongly, despite rising copper prices. Companies in this sector have demonstrated an ability to pass on increased costs to consumers and maintain healthy margins, benefiting from investments in renewable energy, industrialization, and the growth of data centers. However, Mehta cautioned that valuations in the wires and cables sector are currently “very rich,” trading at price-to-earnings ratios of 40 to 60 times, making it less attractive for novel investment.
The current market dynamics suggest a sustained period of growth for PSU banks and the capital goods sector, driven by improving fundamentals and favorable investment conditions. While challenges remain, particularly regarding competitive pressures in banking and execution risks in capital goods, the overall outlook remains positive. Investors are advised to carefully consider these factors and diversify their portfolios accordingly.
Investors will be closely watching upcoming financial reports and policy announcements for further insights into the trajectory of these key sectors. The next major checkpoint will be the release of Q4 FY26 earnings reports, providing a clearer picture of the sustained momentum within PSU banks and the capital goods industry.
What are your thoughts on the current market trends? Share your insights and join the conversation below.
